Cramer: What's the Right Rate for the 10-Year?

Editor's Note: This article was originally published at 7:44 a.m. EDT on Real Money on July 5. To see Jim Cramer's latest commentary as it's published, sign up for a free trial of Real Money.

NEW YORK ( Real Money) -- What is the right level in interest for the 10-year? What should it be? We spend a huge amount of time -- "we" meaning all the people who write and talk about the markets -- discussing what rate the Fed wants interest rates to be. We spend almost no time trying to figure out what the rate should be if the Fed weren't around.

That's because it is easier and more fun, in a media-led discourse, to play the parlor game of what the Fed is going to do. People have sources in Washington, they have people they talk with close to Fed Reserve governors, and it's become quite in vogue since the Great Recession to elevate all Fed speak above everything else, even as by this time it is pretty obvious that we -- same we as above -- have lost much traction with the everyday investor who just wants to make money and knows that there are plenty of stocks that do well no matter what the Fed does. But they aren't the focus because they take a lot of digging to find.

But not only are stocks not talked about, we hardly ever talk about what rates should be. Take the 10-year. I would have thought it should not have been as low as 1.6%, because I can't imagine a banker who would risk making that loan. Sure, we did get some mortgages priced on it, but for the most part in the last four years the mortgages were priced off of a higher level, perhaps a little bit higher than they are being priced now. So, in other words, we did get to what now looks like absurdly low rates as the Fed seemed to buy all the supply around that wasn't bought by bond funds that, in retrospect, look like they were buying on automatic pilot or were, truly, nothing but bull market players. In some ways, who can blame the latter? We have had nothing but a bull market in bonds for 30 years!

The bond world changed May 22. We know that. But did the real world? We had 10-year rates go in a straight line from 1.6% to 2.6% as the bond market correctly ran ahead of tapering. But did it run too far with or without the Fed? That's what I am trying to get at. If the Fed weren't involved at all would there be enough core demand in the economy to take the 10-year to 3%? To 3.5%?

Can you get to 3% without the fed funds rate going to, say, 1%-1.5%? I don't know. But I believe that there simply isn't that much demand for money that is 200 basis points higher than the 10-year, which is pretty much where mortgage rates are settling out.

So, if rates go to 3%, which is what we thought would happen two weeks ago, would there be demand for 5% mortgage money?

Frankly, I doubt it. Not without more jobs being created. That, on a jobs day, brings me back to this chicken-and-egg conundrum. Without more jobs being created, we aren't going to get the demand for money that would send rates still higher.

Of course, if the government started to furiously print 10-year paper and the Fed decided not to buy any of it, perhaps we would have rates go still higher irrespective of actual demand for money. That's always a possibility. But my conclusion, right now at least, is that 3% is about as high as rates could go on a real tapering, which by the Fed's admission we are not having, and that's why we have been able to settle back into a world where we can pick stocks again without fear of another bond avalanche.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.